Litigation Funding: A multibillion-dollar industry for investments in lawsuits with little oversight
Ever heard of litigation funding? It's a relatively new, multibillion-dollar industry where investors fund lawsuits. Here's the idea: say someone was wronged by a big corporation but has no money to sue it. A litigation funder will pay for their court battle. In essence: they're betting on the lawsuit the way traders bet on stocks. If it's successful – they make money, sometimes a lot of money; if it fails – the funders get nothing – their investment is lost.
Litigation funding can help in cases where otherwise the little guy who's suing would just get crushed or lowballed by defendants with deep pockets. Problem is – this market is exploding with nearly no rules or oversight.
Craig Underwood: This is quite an honor to be able to drive you around in my truck.
We start our story in the rolling hills of Ventura County, California, where Craig Underwood's family farm had been growing jalapenos for three decades.
Lesley Stahl: So you used to have peppers as far as the eye could see.
Craig Underwood: As you were driving through the Valley, peppers were everyplace.
Lesley Stahl: But I heard that you had one customer?
Craig Underwood: One customer. Huy Fong Foods.
Huy Fong makes the world-famous Sriracha Hot Sauce. In 2016, they abruptly severed ties with Underwood. His business dried up overnight.
Lesley Stahl: Is there anything growing here at all? Can you tell?
Craig Underwood: There's nothing planted here. And up here, it's just weeds --
Facing ruin, he sued Huy Fong for breach of contract and won: $23 million.
Lesley Stahl: But they appealed?
Craig Underwood: They appealed.
Lesley Stahl: You couldn't collect any of the money?
Craig Underwood: No. We were looking at whether we could survive or not. Every week we were trying to find enough cash to pay the bills, make sure we could make payroll.
He couldn't afford to keep fighting, until he heard of an investment firm that backs people in his situation.
Christopher Bogart: We make the playing field level. And that's what people should be wanting in litigation.
Christopher Bogart is the CEO of Burford Capital. He funds litigants and takes a chunk of their award, if they win.
Christopher Bogart: We are a multibillion-dollar company because litigation is expensive. And there's an awful lot of demand from businesses for this kind of solution.
Lesley Stahl: So is it a loan?
Christopher Bogart: It's a non-recourse financing.
Lesley Stahl: What does "non-recourse"? What does that mean?
Christopher Bogart: What it means is that if the case that we're financing doesn't succeed, then we don't get our money back. And so it's different from a loan in the sense that a loan obviously you're always having to pay back the principle.
Lesley Stahl: If your side loses, you get nothing?
Christopher Bogart: That's correct.
Still, Craig Underwood was torn, because if he won the appeal, Burford would get a big chunk. But, seeing no other choice, he took $4 million from them. Soon after, he won the appeal and the $23 million. But then he had to pay his lawyers and square away with Burford.
Craig Underwood: We had to give them $8 million to pay for the-- the 4 that we got and the 4 that, you know, was their… umm…
Lesley Stahl: Did you think when you realized they were gonna charge you 100% that that was predatory?
Craig Underwood: Some people might think that. I didn't feel that way. 'Cause they stepped in and helped us out when we couldn't have gotten money from anybody else. They basically rescued us.
Founded in 2009, Burford is the world's largest litigation funder, with $5 billion invested in multiple lawsuits.
Lesley Stahl: Is it actually safer in today's environment to invest in litigation than in the stock market?
Christopher Bogart: Well, the benefit that you get from litigation is that litigation doesn't fluctuate the same way that the markets do.
Lesley Stahl: What's your average investment?
Christopher Bogart: When we're financing a single piece of litigation, it would be very rare for us to be below $5 million. And it goes up from there.
Lesley Stahl: So let's say you have a huge case with tens of millions of dollars. What kind of percentage do you expect to win in the end?
Christopher Bogart: On an average basis, we'll largely double our money.
Lesley Stahl: Are there cases where you actually walked away with more money than the plaintiff, the person who was wronged?
Christopher Bogart: So that doesn't happen very often.
Lesley Stahl: But occasionally--
Christopher Bogart: It certainly can happen.
There's no legal limit on how big a chunk litigation funders can take and the deals are confidential. Bogart argues that the reason they demand so much is because of the big risks they take. But actually they pick their cases very carefully.
Lesley Stahl: So these are all lawyers?
Christopher Bogart: Indeed they are.
Lesley Stahl: And what are they doing?
Christopher Bogart: They are fundamentally vetting potential cases that we might finance for corporate clients.
Christopher Bogart: We certainly do diligence on those matters to try to choose ones that are meritorious and that will be successful.
Lesley Stahl: How often are you right?
Christopher Bogart: We're right about 90% of the time and we're wrong about 10% of the time.
Lesley Stahl: What if the client that you've given all this money to, invested in, wants to settle, and you think that's a mistake.
Christopher Bogart: Clients are free to run their litigations as they see fit. They're free to work with their lawyers as they see fit. And we don't interfere with that relationship. It's not uncommon for them to come and ask for our advice but it's advice. And the client is free to disregard that advice and take its own path.
But Maya Steinitz, a law professor at the University of Iowa, says there are ethics rules for lawyers, but not for these investors.
Maya Steinitz: The funders are not regulated. There's nothing precluding them legally from pressuring a client to settle. The rules of ethics are very clear that the lawyer has to abide by the wishes of the client. But human nature is human nature. There may be an inclination to be pulled towards the person who is paying.
Lesley Stahl: Why is this important? Why should someone out there who's not involved in a lawsuit care?
Maya Steinitz: For multiple reasons. First of all, there is this new industry and a new type of player, "litigation funders," who are reshaping every aspect of the litigation process - which cases get brought, how long are they pursued, when are they settled. But all of this is happening without transparency. So we have one of the three branches of government, the judiciary, that's really being quietly transformed. And there's -
Lesley Stahl: Very little oversight.
Maya Steinitz: Very little oversight.
Lesley Stahl: Who is working to impose regulations, insist on transparency in this industry?
Maya Steinitz: One entity that's been very vocal is the U.S. Chamber of Commerce that represents big businesses because the sector that's most concerned about this is big corporations now there's money to sue them, and there's money to persevere, and not to settle early at a discount.
Lesley Stahl: Big business would like to have regulation? How interesting, 'cause they don't like regulation.
Maya Steinitz: Generally.
Lesley Stahl: Except when it helps them
Maya Steinitz: Generally.
Burford usually funds huge cases, involving big, sophisticated corporations. There are only a handful of investment firms like it, whose business is solely investing in litigation. But hedge funds, foreign government funds, and wealthy individuals are also getting into this market. But because there are no regulations, in most cases, litigation funders remain anonymous in court.
In 2012, a billionaire, Peter Thiel, secretly funded wrestler Hulk Hogan's invasion of privacy lawsuit against the website Gawker that drove it out of business. Thiel had his own long-standing score to settle with the site.
But litigation funding isn't just for giant cases worth gazillions.
There are ads for a whole other category of litigation funding. Companies that offer quick cash directly to individuals who are suing in smaller cases, usually over personal injury accidents.
They need the money to pay their household bills so they can hold out for larger settlements.
Advertisment: The beauty of pre-settlement funding is that if you lose, you don't have to pay back anything.
But in the ads, it's easy to miss that if you win, you might have to pay a hefty sum.
This group of litigation funders charges so much because, again, they say the risk is so high… especially given that the applicants for these advances are often broke, injured, out of work and with no assets. But we found rates running high even when there's seemingly minimal or no risk.
Take the case of former NYPD officer Donald Sefcik who was entitled to money from the 9/11 Victim Compensation Fund. He became ill after he raced to ground zero.
Lesley Stahl: And how long did you stay?
Donald Sefcik: I stayed there approximately nine days.
Lesley Stahl: Inhaling all that—dust.
Donald Sefcik: It was so much dust down there that you could not see your hand in front of your face.
Lesley Stahl: So obviously you had medical issues.
Donald Sefcik: Yeah. I couldn't run, I couldn't breathe.
Lesley Stahl: So you were entitled from that Victims' Compensation Fund to get $90,000.
Donald Sefcik: Yes, I was—
Lesley Stahl: You were told you would get $90,000. You got $10,000 up front.
Donald Sefcik: Yes.
He knew he would eventually get more, but in the meantime, he needed money for his medical care. So an ad in the paper caught his eye.
Donald Sefcik: It said, "RD Legal Funding can get your money faster. We can cut through the red tape." And so I called RD Legal Funding, but then after I signed all the documents and sent over to 'em-- they came back at a interest rate that I couldn't even figure out. The document was very confusing. I couldn't even understand it.
Michael Barasch: I'm a lawyer 40 years, I couldn't understand it.
Michael Barasch is Sefcik's lawyer.
Michael Barasch: They lent him $25,000. He had to repay $64,800.
Lesley Stahl: And you paid it? Did you-- did you-
Donald Sefcik: I had no choice. No-- I had no choice. I paid it. Out of the $90,000 I ended up with about $30,000 of it. I feel totally just taken advantage of.
Lesley Stahl: The argument from this industry is that they take a big risk when they invest this money.
Michael Barasch: This is not a car accident case against a small insurance company. This was the 9/11 Victim Compensation Fund created by Congress and backed by the U.S. Treasury.
The company told us Sefcik's contract was clear, but his case was part of a lawsuit against RD Legal brought by the New York attorney general. It settled last month; the company denied wrongdoing but had to "provide over $600,000 in debt relief to harmed consumers;" "stop doing business with recipients of 9/11 victim compensation funds;" and pay a $1 penalty.
So how do litigation funders like this get away with charging such exorbitant rates? If you take out – say, a car loan, usury laws that prevent predatory lending cap the interest rate… in New York at 16%. But remember, these aren't loans per se. They're "investments." litigation funders – for giant and personal cases – argue that this market is offering a lifeline to those who have nowhere else to turn. And legal scholars, like Maya Steinitz, agree.
Maya Steinitz: Accessing the courts in a civil process is a luxury good in today's America. Lawyers charge hundreds of dollars by the hour. So if you have been injured, if you have been discriminated against, if a contract that you have entered into has been breached, it's simply too expensive to bring your case in court. So I think litigation funding is essential. However, personally I think that litigation funding should be regulated, but I certainly don't think it should be prohibited.
Produced by Shachar Bar-On and Jinsol Jung. Broadcast associate, Wren Woodson. Edited by Peter M. Berman.
for more features.